How is Dollar Portfolio VaR calculated according to the combination of assets?

The calculation of Dollar Portfolio VaR incorporates both the individual VaR values of the assets and the correlation between them to assess the total risk of the portfolio. The correct formula reflects the relationship between the variances of the assets in the portfolio and the impact of their correlation.

In this context, the squared VaR values of the individual assets (like stocks and bonds) are added together, and the covariance between them, which is influenced by their correlation, is also included in the equation to account for how they interact with one another in the context of overall risk. This interaction is crucial because the VaR of the combined portfolio may not simply be the sum of the individual VaRs due to the diversification effects and correlations between asset returns.

The key aspect of this correct formula is the use of the correlation coefficient, which effectively adjusts the combined risk based on how the assets perform relative to each other. It accounts for potential non-linearities and interactions in their behavior, leading to a more accurate representation of the portfolio's risk.

Using just a simple addition of the individual VaRs would overlook this essential relationship, hence making it less accurate. Options that do not account for the correct application of correlation or the squares of the individual VaRs are incomplete and may